22336 Federal Register / Vol. 76, No. 77 / Thursday, April 21, 2011 / Proposed Rules 

DEPARTMENT OF THE TREASURY 

Internal Revenue Service 

26 CFR Part 1 

[REG–118761–09] 

RIN 1545–BI92 

Controlled Groups; Deferral of Losses 

AGENCY: Internal Revenue Service (IRS), 

Treasury. 

ACTION: Notice of proposed rulemaking. 

SUMMARY: This document contains 

proposed regulations that provide 

guidance concerning the time for taking 

into account deferred losses on the sale 

or exchange of property between 

members of a controlled group. These 

proposed regulations affect members of 

a controlled group and their 

shareholders. 

DATES: Written and electronic comments 

and requests for a public hearing must 

be received by July 20, 2011. 

ADDRESSES: Send submissions to: CC: 

PA: LPD: PR (REG–118761–09), Internal 

Revenue Service, PO Box 7604, Ben 

Franklin Station, Washington, DC 

20044. Submissions may be hand 

delivered to: CC:PA:LPD:PR Monday 

through Friday between the hours of 

8 a.m. and 4 p.m. to CC:PA:LPD:PR 

(REG–118761–09), Courier’s Desk, 

Internal Revenue Service, 1111 

Constitution Avenue, NW., Washington, 

DC, or sent electronically via the 

Federal eRulemaking Portal at http:// 

www.regulations.gov (IRS REG–118761– 

09). 

FOR FURTHER INFORMATION CONTACT: 

Concerning the proposed regulations, 

Bruce A. Decker (202) 622–7790; 

concerning submissions of comments 

and/or requests for a public hearing, 

Richard.A.Hurst@irscounsel.treas.gov, 

or (202) 622–7180. 

SUPPLEMENTARY INFORMATION: 

Background 

This document provides guidance 

concerning the Federal income tax 

treatment of deferred losses on the sale 

or exchange of property between 

members of a controlled group, 

including transactions in which the 

member acquiring the property 

subsequently recognizes a 

corresponding gain with respect to the 

property. 

Section 267(a)(1) provides that no 

deduction shall be allowed for any loss 

on the sale or exchange of property 

between certain related persons. Section 

267(f)(2) contains an exception for a loss 

on the sale or exchange of property 

between members of a controlled group. 

For this purpose, ‘‘controlled group’’ has 

the meaning defined in section 1563(a) 

except that ‘‘more than 50 percent’’ is 

substituted for ‘‘at least 80 percent’’ each 

place it appears. In the case of a sale or 

exchange of loss property between 

members of a controlled group, the loss 

is deferred rather than disallowed. 

Under section 267(f)(2)(B), the loss is 

deferred until the property is transferred 

outside of the controlled group and 

there would be recognition of loss under 

consolidated return principles or until 

such other time as may be prescribed in 

regulations. 

The regulations under section 267(f) 

provide that the timing principles for 

intercompany sales or exchanges 

between members of a consolidated 

group (see generally § 1.1502–13(c)(2)) 

apply to sales or exchanges of property 

at a loss between members of controlled 

group. See § 1.267(f)–1(a)(2). The 

attribute redetermination rules 

applicable to transactions between 

members of a consolidated group (see 

§ 1.1502–13(c)(1)), however, do not 

apply to sales or exchanges between 

members of a controlled group. See 

§ 1.267(f)–1(a)(2)(i)(B)). For example, if a 

member of a consolidated group (S) 

holds land for investment and sells the 

land at a loss to another member of its 

consolidated group (B), and B develops 

the land and sells developed lots to 

unrelated customers, S’s intercompany 

loss will be taken into account when B 

sells the property to the unrelated 

person. Furthermore, S’s loss will be 

recharacterized as an ordinary loss, even 

though S’s loss would otherwise be a 

capital loss given its separate-entity 

status as holding the property for 

investment. See § 1.1502–13(c)(4)(i), 

(c)(7)(ii), Example 2. If B and S were 

members of a controlled group but not 

a consolidated group, S’s loss would 

also be taken into account when B sells 

the parcel to an unrelated person, but 

S’s loss would retain its character as a 

capital loss. 

The attribute redetermination rule 

applicable to intercompany transactions 

between consolidated group members 

may have the effect of eliminating an 

intercompany loss with respect to a 

corporation’s stock. For example, 

assume that S, a subsidiary in a 

consolidated group, owns 100 percent of 

the stock of T, a solvent corporation. S 

sells 30 percent of T’s stock at a loss to 

B, the common parent of the 

consolidated group that includes S. In a 

subsequent, unrelated transaction (and 

before any change in the value of the T 

stock), T liquidates. The attribute 

redetermination rule of § 1.1502– 

13(c)(1) recharacterizes S’s 

intercompany loss to produce the same 

results to the consolidated group as a 

whole as if S and B were divisions of 

a single corporation. Under these facts, 

the subsequent liquidation of T, tax-free 

under section 332, would cause S’s 

intercompany loss to be treated as a 

noncapital nondeductible amount. See 

§ 1.1502–13(f)(7), Example 5(c). 

Although the attribute 

redetermination rule generally does not 

apply to sales or exchanges between 

members of a controlled group, 

§ 1.267(f)–1(c)(1)(iv) contains a special 

rule with respect to losses that would 

have been redetermined to be a 

noncapital, nondeductible amount if the 

consolidated return attribute 

redetermination rule did apply. Under 

§ 1.267(f)–1(c)(1)(iv), if an intercompany 

loss between members of a consolidated 

group would have been redetermined to 

be a noncapital, nondeductible amount 

as a result of the attribute 

redetermination rule applicable to 

consolidated groups, but is not 

redetermined because the sale or 

exchange occurred between members of 

a controlled group (to which the 

attribute redetermination rule does not 

apply), then the loss will be deferred 

until S and B are no longer in a 

controlled group relationship. Thus, if 

the facts in the example in the 

preceding paragraph were the same, 

except that B was the parent of a 

controlled group that included S, rather 

than a consolidated group, under the 

principles of section 267(f), the IRS and 

Treasury Department believe that S’s 

loss on the sale or exchange of T stock 

should be deferred until S and B (and 

their successors) are no longer in a 

controlled group relationship. 

Furthermore, assume S1 and S2, both 

members of a consolidated group, each 

own 50 percent of the stock of T. If the 

basis of the T stock is greater than its 

value, a liquidation of T would 

generally result in non-recognition of 

the loss through the application of 

§ 1.1502–34 and section 332. In an 

attempt to avoid the non-recognition of 

the loss, either S1 or S2 may sell more 

than 20 percent of T’s stock to a 

nonconsolidated, controlled group 

member in a transaction that is treated 

as a sale or exchange for Federal income 

tax purposes. Thereafter, T is liquidated 

in an attempt to recognize a loss on 100 

percent of the subsidiary’s stock. The 

IRS and Treasury Department believe 

that in these situations, the loss should 

similarly be deferred until the buying 

and selling members are no longer in a 

controlled group relationship. 

In a controlled group setting, 

taxpayers have noted that the current 

regulations do not allow S to take into 


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Federal Register / Vol. 76, No. 77 / Thursday, April 21, 2011 / Proposed Rules 22337 

account any amount of the 

intercompany loss when B recognizes a 

corresponding gain. For example, if S 

sells 30 percent of T’s stock to B at a 

loss (in a transaction that is treated as 

a sale or exchange for federal income tax 

purposes) and T’s stock appreciates 

between the time of the intercompany 

sale and a subsequent event that results 

in B’s recognition of gain (that is T’s 

liquidation), B would recognize a gain 

under section 331 at that time, but S’s 

loss would remain deferred in its 

entirety. Accordingly, the IRS and the 

Treasury Department propose to modify 

the current regulations and allow S’s 

intercompany loss to be taken into 

account to the extent that B recognizes 

a corresponding gain, in addition to the 

other events that result in acceleration. 

Explanation of Provisions 

These proposed regulations provide 

that, for purposes of determining 

whether a loss would be determined to 

be a noncapital, nondeductible amount 

under the principles of § 1.1502–13, 

stock held by the selling member, stock 

held by the buying member, and stock 

held by all members of the seller’s 

consolidated group as well as stock held 

by any member of a controlled group of 

which the seller is a member that was 

acquired from a member of the seller’s 

consolidated group must be taken into 

account. In addition, certain losses on 

the sale or exchange of property 

between members of a controlled group, 

which have been deferred, are taken 

into account upon the occurrence of 

either of two events. The deferred loss 

is taken into account to the extent of any 

corresponding gain that the member 

acquiring the property recognizes with 

respect to the property. Alternatively, 

the deferred loss is taken into account 

when the parties to the transaction cease 

to be in a controlled group relationship. 

In the example, under the proposed 

regulations, S’s loss will be recognized 

to the extent of the amount of 

corresponding gain recognized by B 

upon the event that results in 

recognition of that gain (that is T’s 

liquidation). 

Proposed Effective/Applicability Date 

These proposed regulations will apply 

to loss redetermination events that 

occur after the date the regulations are 

published as final regulations in the 

Federal Register. 

Special Analyses 

It has been determined that this notice 

of proposed rulemaking is not a 

significant regulatory action as defined 

in Executive Order 12866. Therefore, a 

regulatory assessment is not required. It 

is hereby certified that these proposed 

regulations will not have a significant 

economic impact on a substantial 

number of small entities. This 

certification is based on the fact that 

these regulations primarily affect 

controlled groups of corporations which 

tend to be larger businesses. Therefore, 

a Regulatory Flexibility Analysis under 

the Regulatory Flexibility Act (5 U.S.C. 

chapter 6) is not required. Pursuant to 

section 7805(f) of the Internal Revenue 

Code, this regulation has been 

submitted to the Small Business 

Administration for comment on its 

impact on small governmental 

jurisdictions. 

Comments and Requests for Public 

Hearing 

Before these proposed regulations are 

adopted as final regulations, 

consideration will be given to any 

written (a signed original and eight (8) 

copies) or electronic comments that are 

submitted timely to the IRS. The IRS 

and the Treasury Department request 

comments on the clarity of the proposed 

rules and how they can be made easier 

to understand. All comments are 

available at http://www.regulations.gov 

or upon request. A public hearing will 

be scheduled if requested in writing by 

any person that timely submits written 

comments. If a public hearing is 

scheduled, notice of the date, time, and 

place for the public hearing will be 

published in the Federal Register. 

Drafting Information 

The principal author of these 

regulations is Bruce A. Decker, Office of 

Associate Chief Counsel (Corporate), 

IRS. However, other personnel from the 

Treasury Department and the IRS 

participated in their development. 

List of Subjects in 26 CFR Part 1 

Income taxes, Reporting and 

recordkeeping requirements. 

Proposed Amendments to the 

Regulations 

Accordingly, 26 CFR part 1 is 

proposed to be amended as follows: 

PART 1—INCOME TAXES 

Paragraph 1. The authority citation 

for part 1 continues to read in part as 

follows: 

Authority: 26 U.S.C. 7805 * * * 

Par. 2. Section 1.267(f)–1 is amended 

as follows: 

1. Paragraph (c)(1)(iv) is revised. 

2. Paragraph (l)(3) is redesignated as 

paragraph (l)(4) and paragraph (l)(3) is 

added. 

The addition and revision read as 

follows: 

§ 1.267(f)–1 Controlled groups. 

* * * * * 

(c) * * * 

(1) * * * 

(iv) B’s item is excluded from gross 

income or noncapital and 

nondeductible. To the extent S’s loss 

would be redetermined to be a 

noncapital, nondeductible amount 

under the principles of § 1.1502–13, but 

is not redetermined because of 

paragraph (c)(2) of this section (which 

generally renders the attribute 

redetermination rule inapplicable to 

sales between members of a controlled 

group), S’s loss continues to be deferred. 

The preceding sentence does not apply, 

however, to the extent paragraph 

(c)(1)(iii) of this section applies as a 

result of a transfer of the property to 

certain related persons. If the loss is 

deferred, it is taken into account when 

S and B (including their successors) are 

no longer in a controlled group 

relationship or to the extent of any 

corresponding income or gain 

recognized by B with respect to the 

property, whichever occurs first. For 

example, if S sells all of the stock of 

corporation T to B at a loss (in a 

transaction that is treated as a sale or 

exchange for Federal income tax 

purposes), and T subsequently 

liquidates in an unrelated transaction 

that qualifies under section 332, S’s loss 

is deferred until S and B are no longer 

in a controlled group relationship. 

Similarly, if S owns all of the T stock, 

sells 30 percent of T’s stock to B at a 

loss (in a transaction that is treated as 

a sale or exchange for Federal income 

tax purposes), and T subsequently 

liquidates into S and B, S’s loss on the 

sale is deferred until S and B (including 

their successors) are no longer in a 

controlled group relationship. If B 

recognizes any income or gain on 

amounts received in a distribution in 

complete liquidation of T, S will take 

into account its deferred loss on its sale 

of T stock to the extent of B’s gain. For 

purposes of this paragraph, stock held 

by S, stock held by B, and stock held by 

all members of S’s consolidated group 

as well as stock held by any member of 

a controlled group of which S is a 

member that was acquired from a 

member of S’s consolidated group must 

be taken into account in determining 

whether a loss would be determined to 

be a noncapital, nondeductible amount 

under the principles of § 1.1502–13. 

* * * * * 

(l) * * * 

* * * * * 


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22338 Federal Register / Vol. 76, No. 77 / Thursday, April 21, 2011 / Proposed Rules 

(3) Loss redetermination events. 

Paragraph (c)(1)(iv) of this section 

applies to loss redetermination events 

occurring after the date these 

regulations are published as final 

regulations in the Federal Register. 

Steven T. Miller, 

Deputy Commissioner for Services and 

Enforcement. 

[FR Doc. 2011–9606 Filed 4–20–11; 8:45 am] 

BILLING CODE 4830–01–P 

DEPARTMENT OF THE TREASURY 

Alcohol and Tobacco Tax and Trade 

Bureau 

27 CFR Part 9 

[Docket No. TTB–2011–0004; Notice No. 

117; Re: Notice Nos. 34 and 42] 

RIN 1513–AB44 

Proposed Fort Ross-Seaview 

Viticultural Area; Comment Period 

Reopening 

AGENCY: Alcohol and Tobacco Tax and 

Trade Bureau, Treasury. 

ACTION: Notice of proposed rulemaking; 

comment period reopening. 

SUMMARY: The Alcohol and Tobacco Tax 

and Trade Bureau is reopening the 

comment period for Notice No. 34, 

which concerned the proposed 

establishment of the Fort Ross-Seaview 

viticultural area in western Sonoma 

County, California. Through this notice, 

TTB is soliciting comments on the 

establishment of the Fort Ross-Seaview 

viticultural area as proposed in Notice 

No. 34 and the issues raised in the 

public comments received in response 

to that notice, including a request to 

expand the proposed viticultural area. 

Given the conflicting evidence provided 

by the petitioner and by some 

commenters with respect to the 

distinguishing features and boundary of 

the proposed viticultural area, and the 

length of time that has passed since 

Notice No. 34 was published in 2005, 

TTB believes that the rulemaking record 

regarding the proposed Fort RossSeaview viticultural area should be 

reopened for public comment to ensure 

full public participation prior to any 

final regulatory action. 

DATES: Written comments on the 

proposed Fort Ross-Seaview viticultural 

area are due on or before June 6, 2011. 

ADDRESSES: You may send comments on 

Notice No. 34 to one of the following 

addresses: 

• http://www.regulations.gov: Use the 

comment form for Notice No. 34 as 

posted within Docket No. TTB–2011– 

0004 on ‘‘Regulations.gov,’’ the Federal 

e-rulemaking portal, to submit 

comments via the Internet; 

• Mail: Director, Regulations and 

Rulings Division, Alcohol and Tobacco 

Tax and Trade Bureau, P.O. Box 14412, 

Washington, DC 20044–4412. 

• Hand Delivery/Courier in Lieu of 

Mail: Alcohol and Tobacco Tax and 

Trade Bureau, 1310 G Street, NW., Suite 

200–E, Washington, DC 20005. 

See the Public Participation section of 

this notice for specific instructions and 

requirements for submitting comments, 

and for information on how to request 

a public hearing. 

You may view copies of the petitions, 

supporting materials, published notices, 

and all public comments associated 

with this proposal within Docket No. 

TTB–2011–0004 at http:// 

www.regulations.gov. You also may 

view copies of the petitions, supporting 

materials, published notices, and all 

public comments associated with this 

proposal by appointment at the TTB 

Information Resource Center, 1310 G 

Street, NW., Washington, DC 20220. 

Please call 202–453–2270 to make an 

appointment. 

FOR FURTHER INFORMATION CONTACT: 

Elisabeth C. Kann, Regulations and 

Rulings Division, Alcohol and Tobacco 

Tax and Trade Bureau, 1310 G Street, 

NW., Suite 200E, Washington, DC 

20220; phone 202–453–2002. 

SUPPLEMENTARY INFORMATION: 

Fort Ross-Seaview Rulemaking History 

Original 2003 Petition and Notice 

No. 34 

In 2003, Patrick Shabram, on his own 

behalf and on behalf of David Hirsch of 

Hirsch Vineyards, submitted a petition 

to establish the 27,500-acre ‘‘Fort RossSeaview’’ American viticultural area in 

western Sonoma County, California 

(hereinafter the ‘‘2003 petition’’). The 

proposed Fort Ross-Seaview viticultural 

area is completely within the existing 

North Coast (27 CFR 9.30) and Sonoma 

Coast (27 CFR 9.116) viticultural areas. 

At the time of the 2003 petition, the Fort 

Ross-Seaview viticultural area 

contained 18 commercial vineyards, 

which covered approximately 506 acres. 

In response to the 2003 petition, TTB 

published Notice No. 34, a notice of 

proposed rulemaking regarding the 

establishment of the Fort Ross-Seaview 

viticultural area, in the Federal Register 

of March 8, 2005 (70 FR 11174). In that 

notice, TTB requested comments by 

May 9, 2005, from all interested 

persons. In response to a request from 

a local wine industry member, TTB 

subsequently extended the comment 

period for Notice No. 34 until June 8, 

2005 (see Notice No. 42, 70 FR 25000, 

May 12, 2005). 

Comments Received in Response to 

Notice No. 34; Proposed Expansion 

Request 

In response to Notice No. 34, TTB 

received seven comments concerning 

the proposed establishment of the Fort 

Ross-Seaview viticultural area. Two 

local wine industry members supported 

the petition without qualification; a 

third industry member supported the 

viticultural area’s establishment while 

expressing concern about the potential 

effect of the proposed viticultural area 

on his ‘‘Fort Ross’’ brand names if ‘‘Fort 

Ross’’ alone were determined to be a 

term of viticultural significance. 

Four commenters, all owners or 

operators of Sonoma County wineries 

and vineyards, opposed the 

establishment of the Fort Ross-Seaview 

viticultural area as outlined in Notice 

No. 34. Stating that their vineyards, all 

located to the north of the proposed Fort 

Ross-Seaview viticultural area, have the 

same viticultural characteristics as those 

found within the proposed area, these 

four commenters requested that TTB 

delay a final decision on the 

establishment of the Fort Ross-Seaview 

viticultural area so that they could 

gather additional evidence to support 

their contention that the proposed 

viticultural area should be expanded to 

include their properties. 

In response, TTB advised the 

opposing commenters that evidence in 

support of a northern expansion of the 

proposed Fort Ross-Seaview viticultural 

area must be submitted to TTB in order 

for the agency to consider their request. 

Subsequently, three of the opposing 

commenters submitted documentation 

to TTB in support of a 15,726-acre 

northern expansion of the Fort RossSeaview viticultural area proposed in 

Notice No. 34. 

After submission of the commenters’ 

documentation in support of a northern 

addition, TTB shared the 

documentation with the petitioner for 

the Fort Ross-Seaview viticultural area. 

In response, Patrick Shabram, the author 

of the 2003 Fort Ross-Seaview 

viticultural area petition and a 

professional geographer specializing in 

Sonoma County viticulture, submitted 

additional documentation to support the 

originally petitioned proposed Fort 

Ross-Seaview viticultural area name and 

boundary line. 

Revision of Viticultural Area 

Regulations 

On January 20, 2011, TTB issued a 

final rule revising certain sections of its 


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